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Your Social Security COLA increase could be smaller than expected next year

Social Security beneficiaries could receive a 3% cost-of-living adjustment in 2025, according to a new analysis, as inflation shows signs of moderating.

Social Security recipients are on track to receive a cost-of-living adjustment (COLA) next year that is smaller than previously expected after inflation moderated more than expected in May.

Mary Johnson, a retired Social Security and Medicare analyst, estimated the adjustment could be about 3%, based on May inflation data, which showed the consumer price index was unchanged from the previous month and is up 3.3% from the same time last year.

Both figures are lower than expected, suggesting high inflation is loosening its grip on the U.S. economy.

INFLATION RISES 3.3% IN MAY, LESS THAN EXPECTED

The annual Social Security change is calculated based on the Consumer Price Index for Urban Wage Earners and Clerical Workers, or the CPI-W, from July, August and September. The CPI-W also posted a 3.3% increase in May.

Should Social Security beneficiaries see a 3% increase in their monthly checks next year, it would mark a steep decline from both 2023, when recipients saw an 8.7% bump and from 2024, when benefits rose by 3.2%.

However, it remains higher than the 2.6% average increase recorded over the past two decades.

An increase of that magnitude would raise the average retiree benefit of $1,907 by about $57.21 per month. 

HOMEOWNERSHIP COSTS IN THE US SURGED 26% SINCE THE START OF 2020

Even with last year's cost-of-living increase, many retirees say they are struggling to keep up with high inflation. Johnson suggested the CPI-W may actually be an inaccurate way of measuring where older Americans actually spend their money.

That's because the CPI-W assumes retirees spend about two-thirds of their income on housing, food and medical costs. In reality, they spend about three-fourths of their income on those necessities. 

"This disparity suggests that my COLA estimate, which is based on the CPI-W, may be undercounting real senior inflation by more than 10%," Johnson said.

This year's 3.2% benefit increase exceeded the actual rate of inflation in March, April and May.

WHAT SKY-HIGH BORROWING COSTS MEAN FOR YOU AND YOUR MONEY

The Social Security Administration will release the final adjustment percentage in mid-October.

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Inflation has created severe financial pressures for most U.S. households, which are forced to pay more for everyday necessities like food and rent. The burden is disproportionately borne by low-income Americans, whose already-stretched paychecks are heavily impacted by price fluctuations. 

The typical U.S. household needed to pay $227 more a month in March to purchase the same goods and services it did one year ago because of still-high inflation, according to calculations from Moody's Analytics chief economist Mark Zandi shared with FOX Business.

Americans are paying on average $784 more each month compared with the same time two years ago and $1,069 more compared with three years ago, before the inflation crisis began. 

The analysis suggests that while inflation has fallen from the highs of mid-2022, many families have yet to see material relief.

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